For retirement, protect clients from themselves

In working on retirement plans with your clients, the most vital strategies can be playing defense and protecting them from their own temptations.Once they retire, many clients start paying much closer attention to the market and become hyper-sensitized to short-term losses, says Ray Mignone, an independent, fee-only certified financial planner in Little Neck, N.Y. Losses that clients would have shrugged off in earlier years loom larger and clients start hanging on the market’s every move. “The stock market doesn’t know that you’ve retired,” Mignone warns.How to avoid this? Mignone says that it’s more important to minimize losses in a down year than to maximize gains during an upturn. “Diversification is the key,” he says. While it “won’t get you rich, it will keep you from getting poor fast.”The reason, of course, is purely mathematical. A client who loses 40% during a crash or a downturn would need a 67% gain to get back to his starting point, Mignone says. But if the loss was limited to 20%, then the client would only need a 25% gain to get even. Psychologically it’s more important for the client to play defense than offense.The biggest risk for many clients’ nest eggs is overspending. Mignone says that young widows who never managed money before tend to be the most vulnerable. They’re not able to say no to their kids—including adult children—and they see a million dollar portfolio and think they can take money out any time they want. To convince them otherwise, advisors should show them cash-flow projection graphs based on their actual assets.Pull it up on the screen and let the clients see the graph, which will show them if they have enough money to last and the size of their buffer. This approach, which takes into account actual savings and circumstances, is much better than trying to apply some rule of thumb, which doesn’t reflect the client’s tax bracket, expenses, cost of living adjusted for the client location, and other particulars.